I will be honest, the Patriots are so dominant and scary that the games are becoming pretty boring to watch. I am a die hard football fan, but the serious clobbering of teams means the game is over in 10 minutes, and that is no where near enough beer drinking time! Maybe the Steeler game in a few weeks will be a good one. Maybe not!
If Subprime is so Small, What's all the Fuss? Leverage!
"Give me a place to stand, and I shall move the world"-Archimedes
The Great philosopher and scientist Archimedes believed that a lever could be set up in such a way as to move the world.
His theory is premised upon the concept of Leverage. Leverage, in the financial sense, is defined by Wikipedia as: "In finance, leverage (or gearing) is using given resources in such a way that the potential positive or negative outcome is magnified. It generally refers to using borrowed funds, or debt, so as to attempt to increase the returns to equity." There are quite a few pundits out there (Realtors, mortgage bankers, and especially Ben Stein) that contend that loan defaults are such a small percentage of outstanding loans, no serious issue will come of them. That would absolutely be true if banks only loaned money that they actually had on hand. Due to the wonders of fractional reserve banking that is not the case. Ever wonder how Fannie Mae can fund a Trillion dollars in mortgages even though the market cap of the company is around 37 Billion dollars? Leverage my friend. Barry Ritholtz over at The Big Picture had a great post on this a little while back:
The problem with the housing bubble unwinding is that banks are so heavily leveraged any losses immediately put them at risk of insolvency. They simply do not have the capital to cover losses that are leveraged up 10 or 20 to 1. Add in the financial magic of derivatives, and now you get an idea why the markets are rightly worried. The financials as a sector are getting creamed, and will continue to be brought down. How much money could be lost? I have no idea, and sadly the banks do not really know yet either.
Daggers Come Out
The Goldman Sachs downgrade to outright "sell" of Citigroup was a new and stunning development in the soap opera of banking. Goldman analysts think Citi has another 15 Billion dollar writedown coming up next quarter. How is that possible when all the losses were written down last quarter you ask? Its called reality. While the feel good story of a one quarter anomaly was all the rage, the reality is that losses are going to continue, and Goldman has voted Citi off the island.
What is strange is why Goldman would make a move like this? Usually the banking clan is a tight knit group. As almost all the banks have used the same methods to destroy the banking system, the Goldman downgrade stands out. Is Goldman immune to the kinds of losses the other brokerages and banks are seeing? I can easily imagine a scenario where Goldman has positioned itself as a strong short in the banking arena, and is now lowering the boom. I did not see press releases and Citi officials going out and disputing the Goldman estimates. I wonder if Goldman was part of the talks to build the SIV superfund, saw how deep the problems where going to be, and ran away screaming.
Goldman's move is akin to sticking a dagger in the back of the banks. At a time when confidence is at extreme lows, this really hurts. I am hoping to see all the dirty laundry start to come out now. Does Citi know anything about Goldman worth reporting? How about Merrill Lynch? There is nothing like a good cat fight, and this may be the start of a good one. Perhaps tempers and distrust will cool off over the holiday week? If not, this could be a real fun show!
FED Rate Cut Now a Market Expectation
One more tidbit from Reuters News:
US RATE FUTURES-Jump; Dec Fed ease fully priced
Futures fully price a one-quarter point rate cut from the Federal Reserve on Dec 11, up from as low as 72 percent earlier in the day and 90 percent indicated on Friday.
Poor Boom Boom Bernanke! The FED has actually made an effort to mention inflation and commodity price spikes, and still the market wants another hit from the easy money bong! We all know how important "market expectations" are to the FED. The Dollar seems to have stabilized. Gold is taking a beating not seen since The Buffalo Bills were in Superbowls. Those two markers either say "No Cut for You!" or they portend serious and diabolical market manipulation. Guess we will have to wait for December 11th. I think a cut is all but guaranteed for what its worth.
I am a Star Wars Nut and I am not ashamed! On the list this year is the Darth Tyrannus (Count Dooku) lightsaber hilt. The gentle curve of the hilt is meant to increase leverage in lightsabe duels when using Form II technique, the elegant form of Makashi combat. I want one.
Have a good night!